IR35 in the Public Sector

Back in 2012 rules were introduced that affected contractors who provided services to the public sector through their limited companies. If the contract with the end client was equal to or longer than six months, and the day rate was equal to or greater than £200, the contractor has 20 days from the issue or renewal of the contract to present evidence of their IR35 status. A failure to present the evidence can lead to the contract being terminated and details passed on to HMRC.

However, in the 2016 Autumn Statement, the Chancellor confirmed that the Public Sector was to undergo a massive revamp in 2017. From the 6th April 2017, ‘off-payroll’ rules brought in meant that the IR35 status of a contractor was no longer determined by themselves, but by the end client Public-Sector organisation. The Public-Sector organisation was not only to make the decision, but to be liable if deemed to have made the wrong decision, which was done so via utilising HMRC’s much scorned online Employment Status Service ‘ESS’ tool for each contract.

This lead to risk averse Public-Sector organisations issuing blanket determinations to thousands of contractors, advising them that they were inside IR35 and that going forward they were to be taxed at source (paying the same tax and National Insurance Contributions ‘NICs’) as if they were an employee, this despite HMRC reminding Public Sector organisations not to do so.

Tax and NICs are now deducted directly by the contractors’ intermediary, meaning if they utilise the services of an agency or other labour provider, they have to inform them that in the view of the Public-Sector organisation, the off-payroll rules apply.

The result was howls of derision on mass from contractors who were now informed they were no longer outside of IR35 but inside it, and that they would have to pay tax as if an employee. To compound the pain, their employment status would not change, meaning they were unable to receive the rights and benefits such as sick pay, maternity or paternity pay, holiday pay and unfair dismissal rights etc that come with being an employee.

But what is a Public-Sector organisation? Well, for the purposes of the off-payroll rules, the definition is set out in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002, meaning that the Public-Sector organisation has to legally respond to freedom of information request, and includes:

Government departments and their executive agencies

Companies owned or controlled by the public sector

Schools and universities

Local authorities

The National Health Service (NHS)

The rules also apply to contractors who provide services through their own intermediary to the UK Parliament, the National Assembly for Wales Commission, and the Northern Ireland Assembly Commission.

As always though there are exceptions. Some Public-Sector organisations that provide medical services are treated differently. Hospitals, GP surgeries and dental practices that provide NHS medical and dental services must consider if the off-payroll rules apply to all contractors working for them through an intermediary. This includes contractors who are providing ophthalmic and pharmaceutical services to the NHS, and ophthalmic and pharmaceutical services. Retail businesses providing ophthalmic and pharmaceutical services for the NHS i.e. high street pharmacies or opticians, do not need to check if the off-payroll working rules apply.

Furthermore, not all Government organisations fall under the Freedom of Information act(s). Bodies such as GCHQ for example are exempt from this due to the sensitive nature of their work.

Ultimately, hindsight shows that not only were the rules and online tool rushed, but the whole revamp was poorly thought through. Whilst the underlying IR35 rules did not change, confidence in HMRC and the Government plummeted to new depths as a result, and left all contractors, freelancers and consultants in the Private-Sector wondering when the rules would be carried over and start to affect them.